Marketing Boards Essay, Research Paper
Marketing Boards are government involved ways of regulating farmer?s production and price, while protecting the overall profit of every farmer in that particular production. Since there is nothing farmers can do about the inelastic nature of the demand for farm products, the key to supporting and stabilizing farm prices and incomes lies in controlling the supply of farm products. In other words, farmers would benefit greatly from an oligopolistic (banning firms together) price and supply agreement among themselves. Farming is a highly competitive industry ? it consists of many small, independent producers selling substantially similar products in a big marketplace.
Given these realities, it has proven very difficult to achieve any kind of agreement or coordinated action on the part of farmers, even when it would be in their best interest to do so. Attempts have been made to use farm cooperatives to restrict production and thus support and stabilize prices; however, these efforts rarely work. Such agreements are voluntary and lack means of enforcement; as a result, too many farmers don?t participate or break the agreements. This is when farmers turned to government assistance to help with their low and unstable incomes and marketing boards was proposed.
In the following we will discuss what marketing boards are, how they work, how they effect the Canadian economy, and how widespread they are. We will focus on particular Canadian producers who use marketing boards and how they are both positive and negative in contributing to the economy. We will also look at how marketing boards are effecting the consumers. In total outlook, the purpose of this review is to provide a clear and explicit focus for the research to be undertaken as well as to establish the scope of the study.
What are Marketing Boards?
The main objective of marketing boards is to operate in the best long term interests of the producer and the consumer. By smoothing out seasonal and alternate supply irregularities in providing farmers with a fair return for their labor and investment. Marketing boards also attempt to promote marketing efficiency through centralized coordination of product and market research, transportation and selling. Marketing Boards are Government-sponsored organizations of farmers that support farm incomes by restricting the supply of produce, usually through a system of quotas on individual farmers.
Every province has marketing boards for each major commodity, and the provincial boards differ widely in their authority over the control of both marketing and production. With the institution of the National Farm and Products Marketing Act in 1972, the first national marketing boards were established- the Canadian Egg Marketing Agency and the Canadian Turkey Marketing Agency. Although operating under separate legislation, the Canadian Dairy Commission and the Canadian Wheat Board are also national boards.
Marketing Boards are criticized for their attempt to manage supply, even though only a few operate comprehensive supply management systems (dairy products, eggs, turkeys and tobacco). Some say that the boards are government- mandated monopolies designed to raise prices above competitive levels, which is a disadvantage to consumers on eggs, broilers, turkeys and milk. A total ?tax? estimate of $500 million to $1 billion annually, not including direct government subsidies to these producers. This tax is not imposed by a legislator but by those who benefit directly for it such as farmers (not consumers). In addition the tax is not visible, as is a sales tax, so it is difficult to measure. Finally, the cost of collecting the tax is high for consumers and producers. In a recent study of the British Columbia Egg marketing boards, it was found that every dollar transferred from consumer to producer cost the consumer $1.25 and the producers as much as $0.65.
By intervening in the normal operation of the market system, marketing boards create two major problems. First, the cost of operating the market boards is added to the farm price of the product, and the consumer actually pays proportionally more than the original cost added to the farm price because the retail price is calculated as a percentage of the wholesale price. Second, the production quota system, which has to go along with any supply- management system, restricts from freely expanding their production according to their ability to run an efficient operation. For example, all egg producers have quotas on egg- laying hens. Without such a quota, a farmer cannot sell eggs. If the farmer produces more than the quota allows the board can have the excess hens destroyed.
In 1981 the Economic Council of Canada called for the deregulation of the agricultural industry. Marketing boards are negative to deregulation because it would force many farmers out of business and plunge the rest back into extremely high levels of competition. Making more quotas available for the various products would reduce the price of those goods, but it would also create a surplus of products, leaving some producers with a market and some without one. Those that would like to see the powers of marketing boards stripped away suggest that they should exist as a producer association to seek new export markets, to increase domestic demand by advertising and to help avoid shortages and surpluses by spreading current market information to producers.
Marketing Boards combine all producers of a particular product together in hopes of regulating supply and price. Therefore preventing over production, in return making a clear, distinct guideline for farmers to follow with reassurance of an equal profit for their labor.
How do they work?
Marketing Boards work by tying like producers together in a fair agreement that will hopefully benefit all. In order for them to be able to control markets by selling at the price established by the marketing boards, it is essential that the government control imports of those items, so as to keep lower price foreign produce out of the domestic market. Originally this was done through import quotas that strictly limited the amount of foreign products that could enter Canada. Therefore keeping competition on a national level. Marketing Boards are encouraged by the Canadian government, and exempted from anti-monopoly legislation.
A large part of a marketing board agreement is that all Canadian farmers must follow a quota determined by the government. For example, fluid milk producers are required to fulfil their quotas in both summer and winter even though fluid milk is less costly to produce in the summer. Those farmers who do not comply are faced with penalties. Since quotas are a must to be in business, they actually acquire value over time. The quota can be sold to someone else who wants to go into business or to another farmer who wants to increase production and needs a higher quota. Unfortunately, their high costs often deter new entrance to the industry. It is also thought that the security of a fixed income based on a fixed output will discourage producers from putting forth the extra effort and costs needed to increase output.
For twenty years, Canada has national marketing boards to protect such items as milk, chicken, turkey and eggs. The boards manage supply, control prices and limit imports. Supporters of the system insist it is an efficient way to do business. It gears production to known demand and provides stability to Canadian farmers by insulating them from the sometimes-wild fluctuations in world commodity prices. After 1972, when federal legislation paved the way for marketing boards, several sectors of Canadian agriculture went through a dramatic transformation from highly competitive industries to virtually monopolies.
Within (most) marketing boards lie three pillars of advantages for farmers:
1. Single-desk selling: The Canadian Parliament gave producers within a marketing board monopolies so as to gain more control for commanding a higher price for their product. Instead of competing against one another they have formed an alliance leaving the consumer with little options in product selection.
2. Price Pooling: Pooling means that all sales are deposited into pool accounts. This is beneficial to farmers because they all benefit equally. I.e. some agricultural is seasonal so long as the farmer is producing the same grade and meeting the same quota as the next farmer, then regardless of the time and amount of sale all farmers will profit equally.
3. Government guarantee: All farmers receive an initial or partial payment upon delivery. If returns to the pool exceed the sum of the total payments then farmers receive a final payment. Should returns fall short (something that rarely happens) then the federal government makes up the difference.
This helps to prevent bankruptcy and extreme loss to smaller farm industries.
A major question for consumers is ?Do Marketing Boards Impede Competition?? From 1955 to 1975 the annual net income of non-farm unincorporated businesses rose fairly smoothly, the net income for farm operators changed dramatically. One of the major contributors to these dramatic changes, is the weather. Which can result in either a large or small harvest. Either way the farmer?s net income is going to be effected. Another major factor, which hinders today?s farmers, is the initial investment which is substantially greater than other non-farm businesses. By implementing the marketing boards it takes the pressure and incentive off the farmers to produce larger quantities, but it limits the amount of output. In answer to the question, marketing boards only impede competition by limiting consumer variety and options. Marketing Boards are used more to provide a safety net for farmers.
Keeping in mind that the government serves the needs of producers through the regulation of output at the same time it restricts consumer choices. With agricultural marketing boards, producers enjoy higher prices and incomes. Overall, in marketing boards, it is individual consumers who ultimately pay the price for this form of regulation. The political power of farmers has taken precedence over consumers who are politically weaker, less geographically concentrated, and on the whole, less intensely and consistently interested in food prices.
How widespread are they?
Marketing Boards are introduced whenever a particular product becomes highly demanded by the consumer, therefore causing producers to increase output by large quantities. When a product becomes so popular, it encourages new independent farmers to enter the field. This creates high competition making it difficult to obtain an income that is profitable. At this point marketing boards are introduced. This is why products such as wheat, dairy, turkey, etc. have resorted to marketing boards.
In Canada marketing boards are used widely because it serves as a safe guard to guarantee an equal marginal profit for all farmers. The government sets regulations on quotas, imports, supply, and taxes. With all these regulations in a large area of produce it deters international trade. For example, the United States of America tends to avoid marketing boards, and focus?s more on a market system rather than the mixed economy (partial government control) like Canada.
This is why U.S. producers can sell their products cheaper, and market internationally more competitively. For example, in the U.S. many farmers use a cooperative market system rather than relying on the government to enforce regulations that ensure an equal profit for all.
Unfortunately, in Canada our producers cannot be as competitive internationally because we use marketing boards that increase the price for produce. Like anything else, there is both a positive and negative side to using marketing boards, and perhaps they are so widespread because it levels off the highs of boom periods and the lows of recessions, maintaining a steady of income for producers.
How do Marketing Boards affect the Canadian Economy?
In recent years, Canada?s farm income support systems, and especially marketing boards, have come under increasing criticism and pressure for change from various areas both within and outside of Canada. In particular, pressure has been coming from consumer groups, food processors, and Canada?s trading partners. Economically marketing boards focus solely on producers without much thought to consumers.
Consumer Groups have argued for many years that government farm programs were excessively costly to consumers. As noted earlier, marketing boards support farmers by raising the prices paid by consumers. By 1992, farm support programs were costing Canadians an estimated $440 per person per year. Reports are finding that consumers are becoming concerned with the rise in prices and lack of options and choices in their selection of produce.
Canadian food processors are among the group of complainants. Their main concern is that under Canada?s marketing boards, all the government help to farmers made the prices higher (stemming from higher production costs) for Canadian processors. In particular, in the early 1990?s prices of chicken, turkey and milk in Canada were higher than U.S. prices by 50% or more. The U.S. receives subsidies from the government to support their payments, rather than through the higher prices that occur under Canadian marketing boards.
The most serious of issues is regarding Canada?s trading partners, through trade negotiations. Even though a method of keeping our produce prices down would be to limit our imports, in 1995 the World Trade Organization (WTO) agreement broke down the barriers of reducing trade between countries. As a result Canada was no longer allowed to use import quotas and high tariffs were implemented. Although these tariffs serve the same purpose as the quotas, the WTO stated that over the next 6 years these tariffs were to be reduced by 15%. Canadian consumers found this beneficial because of lower prices but the producers found this potentially threatening. The government tried to convince the producers that even though the tariffs were dropping, the marketing boards would still protect them.
Overall, marketing boards may not be necessarily conscience of consumers, but definitely economically sound for producers. All in all, it will remain to be an on going battle to whether the declining tariffs will pose a threat to our Canadian producers.